Unleashing the U.S. Strategic Petroleum Reserve won't hurt Russia

The West needs a different way of reining in Putin

(Image credit: (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service))

In the wake of Russia's invasion of Crimea, the U.S. and Western Europe are considering punitive measures to keep Vladimir Putin's territorial ambitions in check. The main methods used thus far have been visa denials, asset freezes, and travel bans for regime officials, the idea being that if they want to be part of the international community — which entails travel privileges and access to Western businesses and financial services — then they must refrain from opportunistic land grabs in Eastern Europe.

A more drastic measure floating around is the idea of undercutting Russia's oil-dependent economy by bringing down the price of oil. The proposal for economic warfare was outlined by Steve LeVine at Quartz last week:

As of now, Putin is profiting from his invasion. That is because oil prices are up on the risk of a supply disruption. This enriches the Russian state budget, half of which is supported from oil and gas exports. But economist Philip Verleger notes that prices can go down as well as up, and he recommends inflicting pain by engineering the former.

The tool is the U.S. Strategic Petroleum Reserve, the 700-million-barrel underground cache of crude oil waiting in Texas and Louisiana for a rainy day... In an overnight note to clients, Verleger argues that if the US were to ship just 500,000 barrels a day of oil onto the market, it would drive down prices by about $10 a barrel and cost Russia about $40 billion in annual sales. The U.S. could keep doing this for years, he says. "[Russia's] GDP might drop 4 percent, which would certainly count as a 'consequence,'" he says. Half would come from lower oil prices and half from gas sales, whose prices Russia indexes to oil. [Quartz]

This seems like a risky and ineffective strategy that could very easily backfire.

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But not for the reasons that Russia thinks. While Putin's regime has claimed that it can respond to U.S. measures by dumping U.S. Treasury debt — thus spiking American borrowing costs — this would be very foolish. Russia's main ally China owns over a trillion dollars of U.S. Treasury debt, and would not be happy seeing Russia essentially attack its balance sheet. And even if Russia tries a large-scale dump of U.S. debt, the Federal Reserve could simply offset the attack by buying the debt itself.

Here are the actual reasons why opening the Strategic Petroleum Reserve to undermine Putin is a bad idea.

First of all, as Verleger admits, such a strategy is dependent on the compliance of Saudi Arabia and other global oil producers, some of which, like Venezuela and Iran, are not exactly in Washington's sphere of influence. If any or all of these countries — whose financial positions are, like Russia's, dependent on the price of oil — cut supply to counter the glut from Washington, the strategy is totally ineffectual.

Second, even if the strategy lowers oil prices, it will injure large American and European companies, as well as their employees and customers. The revenues of oil giants like Shell, Exxon Mobil, and BP — each of which employs thousands of people — are dependent on the price of oil. The costs of a global price drop will either be felt in falling profits, or passed onto consumers.

Third, the Strategic Petroleum Reserve's original purpose can't simply be waved away. It is meant to be a safety net in case of energy supply shocks resulting from natural disasters, unexpected wars, etc. Deliberately depleting it in the hope of kind-of-sort-of-maybe punishing Putin could leave the U.S. exposed to unexpected energy shortages.

As I have argued before, natural gas is a far more appropriate tool to gradually undermine Putin's leverage over Europe. The U.S. has world-leading natural gas reserves, and boasts very cheap natural gas prices compared to Europe. Many countries in Europe are totally dependent on (expensive) Russian natural gas that Putin can cut off whenever it is politically convenient.

What is needed is for the U.S. to allow more natural gas exports abroad. Under the Bush administration-era Executive Order (EO) 13337, companies wishing to build "facilities for the exportation or importation of petroleum, petroleum products, coal, or other fuels to or from a foreign country" must receive approval from the Department of Energy. Exceptions are made for countries that have a specific free trade agreement with the U.S. While the Obama administration in 2012 granted approval to four export facilities for liquefied natural gas, nearly 20 projects are still awaiting DOE approval.

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John Aziz is the economics and business correspondent at TheWeek.com. He is also an associate editor at Pieria.co.uk. Previously his work has appeared on Business Insider, Zero Hedge, and Noahpinion.